Morningstar | LivaNova Posts Solid 3Q Results as Investors Await Coverage Decision From CMS
Narrow-moat LivaNova again reported a decent quarter composed of better-than-expected revenue growth on weaker profitability. We don't intend to change our $92 fair value estimate as we update our model, which implies approximately 23 times our adjusted earnings estimate for 2019.While there are many moving parts, including currency, subsegment divestitures, and a bigger push to move toward a direct sales model in many international markets, our math implies the firm grew revenue roughly 8% versus last year on an organic, constant currency basis. We think this is a solid result, particularly with the neuromodulation segment up 15.8% in constant currency. Adjusted gross margin was slightly ahead of our estimates, likely due to product mix.
On the other hand, we've seen a continuation of expense growth that's left operating margin lower year to date versus 2017. The increased spending has largely come as management has stepped up its direct to physician and consumer advertising campaign for vagus nerve stimulation, or VNS, therapy in drug-resistant epilepsy patients, along with a meaningful expansion of the firm's research and development budget. Incremental R&D dollars have been focused on product development and the enrollment of multiple ongoing clinical trials, particularly in the newly launched Anthem study for heart failure. While many of these are relatively long-duration investments, we think allocating cash to these areas today lays the groundwork for the firm to strengthen its intangibles-based moat over time.
The next key catalyst for investors will be the proposal from the Centers for Medicare and Medicaid Services, or CMS, regarding the firm's request to overturn its prior decision to not reimburse VNS therapy for use in treatment resistant depression. An update from CMS is expected by Nov. 30. Our back-of-the-envelope math suggests a 15%-20% fair value increase wouldn’t be unreasonable should CMS decide to cover the indication.
LivaNova is a medical device company focused on the development and delivery of therapeutic solutions. Co. has three product franchises: Neuromodulation, which engaged in the design, development and marketing of neuromodulation therapy for the treatment of drug-resistant epilepsy and treatment resistant depression; Cardiac Surgery, which engaged in the development, production and sale of cardiovascular surgery products; and Cardiac Rhythm Management, which engaged in the development, manufacturing and marketing of products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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